Citigroup pressured to break itself up
Pressure intensified on Citigroup Inc. to sell part or all of itself as its stock fell below $4 a share Friday and fears escalated about future loan losses.
Chief Executive Vikram Pandit told managers earlier in the day that he opposed breaking up the company, but the bank’s board of directors was meeting Friday to discuss whether to do exactly that, the Wall Street Journal reported.
What investors are worried about is that all the risky debt sitting on Citigroup’s balance sheet will eventually turn into losses as the economy worsens and the markets stay turbulent -- losses that could be nearly impossible to reverse.
Investors were also fearful that the government might orchestrate a takeover of Citigroup over the weekend that could wipe out common shareholders, said Paul Miller, a Friedman Billings Ramsey banking analyst.
The government was instrumental in JPMorgan Chase & Co.’s buyout of Bear Stearns Cos. and Washington Mutual Inc., deals that left shareholders with little or no payouts.
The Treasury Department, the Federal Reserve and other banking regulators are monitoring the situation, government officials said. They spoke on condition of anonymity because of the sensitive nature of the matter.
Concerns about the solvency of financial institutions were starting to ebb after the downfall earlier in the year of Bear Stearns, Lehman Bros. Holdings Inc. and American International Group Inc. But now they are back with a vengeance as the recession deepens, raising the prospects of more big loan losses.
Citigroup is considered the most vulnerable among the major U.S. banks, failing to turn a profit in the last four quarters when rivals such as New York-based JPMorgan Chase and Charlotte, N.C.-based Bank of America Corp. managed to do so.
Citigroup’s shares tumbled as low as $3.05 on Friday before closing at $3.77, a decline of 20% that left them at their lowest level in nearly 16 years. It was a continuation of a weeklong plunge that could not be stemmed by Saudi investor Prince Alwaleed bin Talal’s decision Thursday to raise his stake in the company to 5% from less than 4%.
The shares have shed 60% of their value since last Friday.
Citigroup has already raised $75 billion in capital this year, including a $25-billion cash investment from the government -- and none of it has been enough to muster confidence.
Raising more money on the open market is “pretty much off the table,” given the recent plunge in the bank’s shares, said William Fitzpatrick, an equity analyst at Optique Capital Management Inc. And raising more cash from outside investors or the government would be “a Band-Aid.”
“You’re going to have to see more sizable divestitures,” Fitzpatrick said. “They’re going to have to make changes here, and they don’t have time on their side anymore.”
People familiar with CEO Pandit’s call Friday with senior managers, who spoke anonymously because the comments during the call were not made public, said his message was similar to that at his town hall meeting with employees Monday -- that Citigroup has adequate capital and that he supports the universal bank model for Citigroup, including arms such as Smith Barney.
On Monday, Pandit said that the universal banking model was “the right model,” and that Citigroup’s strategy was “to be the world’s truly global universal bank.”
Still, one person said, “it’s clear everything is on the table. That wasn’t explicit, but I think it’s clear.”
